Valuing a Money Loser

Most magazine publishers understand that their media properties have a market value based upon some multiple of earnings or sales. Misconceptions abound, but assumptions usually center around "value equals X times something." In a typical scenario, a magazine or company might sell for, say, six times adjusted EBITDA, or higher. In a reasonably profitable company, that number in turn often amounts to one-time gross revenues. Simple enough.

But what if a publishing company is breaking even or losing money? Obviously, any valuation scheme based on earnings multiples won’t work unless the seller pays the buyer a multiple of losses. Surely, even a magazine or publishing house that’s losing money has some value to a buyer. The challenge: arriving at a price that makes sense to both buyer and seller.

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Some magazines simply have no market value. If the title is swimming in red ink, the publisher may never sell it;at any price. In some cases, potential buyers will look upon an available magazine property as no more than a permanent liability. Magazines that will never sell may include:

Any magazine with a sustained history of losses and little or no evidence that a turnaround is doable.

Consumer or b-to-b books in obsolete or obscure fields.

Consumer or b-to-b titles that have suspended publication;the "kiss of death."

Start-ups. Even magazines that are two or three years old will be looked upon with skepticism by buyers.

Subscription based, usually consumer, titles with deferred subscription income greater than the perceived value of the property.

Very small (under $500,000 in revenues) titles and titles that have a weak competitive position in a stagnant market.

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But there are instances in which a magazine property that’s losing money will sell for a respectable gain. One example: A title with a history of decent growth in sales and profits that suffers losses in its current year. In this example, trailing earnings are negative. If the losses can be attributed to one-time, nonrecurring expenses (i.e., start-up development) or a sales problem that has been rectified, the seller can reasonably argue that the deficits should not materially affect value. In this illustration, the selling price might be based on a three-year EBITDA average, with the nonrecurring expenses thrown out. Result: A purchase price that does not unfairly penalize the seller for what amounts to an anomaly, and at the same time represents a good deal for the buyer.

Small, one- or two-title operations that are marginally profitable or even losing money can produce cashflow when acquired by a larger publisher. Remember, all the overhead of the small publisher is absorbed by one or two properties. Under the banner of a larger organization, economies of scale and elimination of duplicated costs (especially general and administrative expenses) can turn a loser into an instant winner. The secret here is to adroitly recast the numbers of the small entity to accurately reflect performance under the larger group. First, identify the "add-back" expenses that will not transfer to the new owner in a sale. Typical add-backs: Excessive compensation, rent, G&A, perks, certain production costs.

Value in a Downturn
When times are good, the entrepreneurial publisher rewards himself and his staff with high incomes and lots of perks, at the same time reducing tax liability. When a downturn strikes, many publishers are slow to cut expenses, and what was once a cash cow is quickly milked dry. Is this troubled operation now of value to a buyer, and, if so, at what price?

If the downturn is due to irreversible market conditions, the publisher may be toast. On the other hand, if the company is an attractive strategic target and its sales problems are correctable, it may be a viable candidate for acquisition. Valuing such an operation takes the same approach. Recast the numbers to reflect reasonable expenses, cut and consolidate. Figure in growth from added market presence and cross-selling opportunities. An acquisition like this will likely fetch a lower multiple, maybe three or four times adjusted (the operative word) earnings, something less than one-time annual revenues. It is unlikely the old management team will be asked to stay on. Let’s hope they salted away a nice retirement stash.

There are rare instances in which a publisher, usually for strategic reasons, will take on a losing property with no early prospects for generating cashflow. Clearly, the buyer sees potential and has a future vision. But publishers do not pay for potential in an acquisition. Here we’ll take a page out of the newspaper M&A business and assign an arbitrary value of 50 percent of gross annual revenues. Translation: This media property is worth something to us, but not much.

Michael D. Kreiter is director at W.B. Grimes & Co., a Gaithersburg, Maryland-based investment firm for the media industry. He can be reached at mkreiter@kc.rr.com.